The Pros and Cons of a Debt Consolidation Loan in South Africa

What are the advantages and disadvantages of a Debt Consolidation Loan?

Consolidate debt into one affordable monthly repayment

This can be a lifeline for people in danger of losing their homes

Debt consolidation offers cheaper interest rates on long-term loans

These loans offer consumers the opportunity to regain financial control of their lives

Don’t allow a consolidation loan to become a “quick fix” solution

Beware that consolidation loan interest rates do not exceed those attached to existing debt

There are two schools of thought regarding Debt Consolidation Loans.

Protagonists believe these loans help debt-ridden households to consolidate their repayments into one affordable monthly amount.

Antagonists feel that these loans “con” consumers into a false sense of security, whereas the cold hard facts are simply that they have shuffled their debts around and not resolved the underlying problems.

What is the appeal of a consolidation loan?

This form of finance allows consumers to consolidate their debt by using one loan to repay a number of smaller debts.

So, instead of dealing with a number of creditors, all with different credit agreements, terms, monthly fees and interest rates, debtors have one loan with one creditor and are liable for only one monthly repayment fee.

Debt Consolidation Loans provide a lifeline for people in danger of losing their homes or motor vehicles because of default repayments.

However, as with any credit facility, you should scrutinise terms and conditions of a consolidation loan before making a final decision.

Let’s take a look at the pros of debt consolidation loans

Consumers consolidate their debt into one affordable monthly repayment.

People with bad credit records or who appear on a black list can still obtain one of these loans.

Lenders believe that consolidation loans facilitate the goal of regaining financial stability and make it easier on households to manage their finances.

Borrowers can consolidate up to five outstanding accounts without having to provide any settlement quotes.

Repayments are usually pegged at between 18 months to six years.

How to apply for a Debt Consolidation Loan

Applying for a Debt Consolidation Loan couldn’t be easier.

All applicants have to do is to provide:

Copies of their ID document

Their latest original pay slip

Their latest bank statements in where three salary cheque deposits appear

Proof of residence

Example of a consolidation loan repayment

Amount borrowed: R20 000

Period of loan: 12 months

Monthly instalment: R2 049.05

Total amount payable: R24 588.60

Now let’s look at the cons

Antagonists believe that this form of financing lulls consumers into a false sense of security, when in fact all that they are achieving to moving their debt around. The underlying problem, namely debt, remains unresolved.

People applying for consolidation loans are already financially stressed or are rapidly heading that way.

These critics believe that a Debt Consolidation Loan is no more than a “quick fix”, somewhat like applying a plaster to a wound.

Who offers Debt Consolidation Loans?

There are a number of Debt Consolidation Loan providers situated throughout South Africa.

However, none of the country’s big four banks offers this type of financing.

Instead, borrowers can apply for a secured loan (an advance on a home loan) or an unsecured loan, such as personal financing.

Applicants must have a clean credit record to obtain financing via these banks.

Applicants who fail to meet existing debt commitments, or who have a record of defaults and judgements, are also more than likely to be turned down.

A debt consolidation check-list

Before opting for this type of loan, ensure that:

The loan will cover all outstanding debts

It will reduce the overall interest rates applicable to the outstanding debts

The loan will reduce monthly repayments

The loan repayment will be a reasonable amount as a percentage of monthly income

If credit life insurance forms part of the loan package, ensure that it covers death, disability or retrenchment

The loan makes provision for financial needs over the next three to five years

Choose debt repayments carefully

Consumers should carefully examine each debt separately and the interest rates linked to each one.

For example, it would be stupid to move a credit card debt into a consolidation loan if the consumer is paying 14% interest on the credit card, but 31% of the consolidation loan.

Conclusion

There is no need to classify Debt Consolidation Loan applicants as “high risk”.

Although it is unlikely that this form of financing will be approved for applicants with bad credit ratings, default payments and judgements against their names, there are thousands of South Africans who have found themselves in debt because of reckless spending decisions or unforeseen circumstances, such as retrenchment.

Debt Consolidation Loans should be used to save in interest repayments, and not simply to reduce long-term debt.

Ultimately, it is up to every individual to change their spending behaviour and to learn to live on less.

Although the underlying problem for many people is debt, there are many savvy ways to deal with the situation.

Avoid falling into the same spending patterns that resulted in debt in the first place.